Broker to Trading

How long might one expect the aftermath of the crisis to continue. It has been a suggestion in this blog that keeping interest rates low for a prolonged period of time may not help a company led recovery. It has been a suggestion as well that QE1 and QE2 and possibly QE3 may help this.

Now, the question might be asked when growth processes begin, is it better to stimulate as early as possible. If one examines how these processes work in markets, it seems that the best time is before the total collapse of values, in this case assets values of companies.

The problem is that these assets were valued on the basis of unsound mortgage related valuations. Does that matter - well, yes because it means there is no basis on which to rebound, for starters. That is an essential condition of a market turn, that values find incorrect valuations. But the problem is that the crisis made assets find possibly correct valuations.

That means there is no basis for that initial rebound, which helps growth processes, assuming there is no asset revaluation from company growth. But QE is taking on this role, it is essentially forcing the market to rebound, but repricing assets with the vast availability of money, pure money flow. The way the market rebounded looks a lot like a too low re-pricing rebound in a trading day.

But is the growth actually occurring going to help this process, because that growth is entirely unconnected with these asset re-pricing, except in as much as money flows into these companies as well. Perhaps, because in each new market rise, the winners are not known at the beginning.

That is the difference between equities and forex, one is seeing only money flow, however much it may be structured by optimization or growth. But in equities one is seeing equity growth. Except now in equities one is seeing in general money flow in equities.

Money flow bids assets up and down without regard for intrinsic value, it is like the way a big bank can force a currency up or down. Yet that tends to result in resistance by the market, and it seems huge reversals, the more it is applied.

Thus it is a dangerous game, if one is concerned with a) currency stability and b) equity valuations rising. Because the desired directionality of equities is up, then pumping assets values is not a good long term strategy.

The implicit hope, from the standpoint of the market is that this interacts with a directionality in the market, what I might term a growth process (in certain circumstances this can be linear), or an optimization given linear directionality.

That said I do not believe that linearity is necessarily that important, traders implicitly structure market processes to give them a temporary linearity within the market, that is what they do. However this temporary linearization may distort directionality within the market.

The same in equities, over longer terms, that is yes, parallel company revolutions, are important, as they provide a basis for investors to linearize this market, in terms of the market itself.

This may act counter to attempts to linearize the forex market, or perhaps to make these attempts more coherent over time, a source perhaps of the removal of those apparent regularities systems and traders try and trade on.

That perhaps structures those internal processes, using forex for this, as they probably are not linear processes. This is perhaps why one cannot force companies to grow, one has to find them before they become money flow targets, and hence devoid of directionality, and one has to do this looking for a functional key in their financial statements.

Evolved processes in complex systems tend not to be linear. This is possibly a consequence of the tendency of systems to adapt, that is over time the adaptation re-writes any linear causality. The optimization may possibly be a consequences of external inputs attempts to linearize.

The point is the acausality of the market may be precisely from attempts to linearize it. But that suggests the mechanism by which one can boost growth with money flow, but the parallel nature of growth suggests it is only a matter of timing.

The problem with stimulus is the effects flow over time, after the initial boost. However that initial boost may be what is important, not the later movements. One could say that traders are in fact chasing this effect, and losing money on the effect.

That is the initial effect is adirectional, but the extent to which the trend can be made directional, is nothing to do with the trend itself. This suggests reasons for the random looking results for pattern trading. It is like reading stories into cloud formations.

Clouds have direction, because they have a wind behind them, forex does not. The fact equities does, in the sense of directionality from precision pricing from forex and company growth may make day trading it, in certain circumstances, more directionally stable.

But that precision pricing in forex, may make trading it more profitable. The problem is the lack of sustained directionality, which makes for losses. This is why a structure based on both forex and equities seems attractive.

The point is the way the market may function, seems to be ways which unmake depressions and recessions, as well as make them, in the sense that they value assets to realistic or true values. That is the recession or depression is probably already there, by the time the markets react.

But they seem to play a role in the creation of the new rise. That is why one should watch markets for signs of a new surge. It may be as well, why it seems possible and desirable to control markets in such a way as to create the appearance of an economic revival. But that results in huge corrections of assets values.

I would suggest that one looks for the signs of company growth, but as well, the capacity of the markets to compute this. These are arguments as well for letting markets function to grow and value.

© 2011 Guy Barry - All Rights Reserved.

The point of a typical auction market, is that lack of knowledge makes it a market in essence out of control of the buyer, but such a market easily collapses down to one where a buyer is in control, if they do not worry about costs.

Financial Markets though do not, in fact they resist this strongly. That resistance seems to come from internal processes in the market. That is, the market most certainly does seem to take control of prices.

In fact those who buy and sell, typically market makers, once the market is made, it is out of their control. But they adjust the market dynamically.

It is why it is out of their control that makes disciplines such as technical analysis, fundamental analysis and so on. What I am interested in is the time the market takes the instrument out of the market maker, the moment the market is made.

My feeling is that this moment is highly important from a computational viewpoint, because it reflects precise valuation. An example of this which can be seen by all participants is the valuation which occurs at the moment of a news event.

That seems to me to have a significance for where the prices will return. A news event is an aggregation of market making and it is as well an example of non-technical trading.

That is, the participants are making a short term investment, having valued the asset. It is no more a gamble than an equity investment. This is perhaps why the initial direction may have some accuracy, because the forex market is at least highly connected with a market based on valuations, namely the equity market. It suggests efforts to value in forex may not be without reward.

That computational viewpoint is a way of looking at what makes the market. The market comes back to the market makers in the form of order flow, for example pricing behavior at '00'. They continually adjust pricing. But what are their criteria ?

This is generally seen as antagonism, that is large banks with a view of the order book running stops for example or simply the fact that take profits and stop loss orders are placed at these levels, as should be well know. But what is that.

It is actually logically restructuring the market. Placing stop loss and take profit orders at '00' has no internal market logic to it (or external economic logic).

The market makers price at levels highly interactive with the processes of the market itself, they have to and from a professional viewpoint they do even if they are valuing assets in terms of their own returns.

This is especially true in forex, where competition keeps pricing to pinpoint accuracy. But there is a structuring of optimization as well. However market maker pricing and re-pricing is exactly that, but is it a discrete process of optimization or is there a global optimization as well.

I suggest in effect in my blog posts that there is, in the sense there are growth processes in the Dow which work irrespective of any inputs. That market becomes fragile though if it is deluged by money flow (the crisis and post crisis). By this I mean orders made not on any inherent value of an instrument, but because circumstances dictate this.

In equities the smart money is usually seen as the money taking positions before the security becomes saturated with orders, pushing it up until the sell orders, perhaps placed by those who made the smart moves, revalue it.

This is true in forex, but the issue is the smartness is not exactly made on valuations of currency pairs, it is mostly made on technical signals, with the exception of those situations detailed above and other circumstances, such as highly fundamentalist approaches.

The issue with those is that the market turns of fundamental valuations (I mean this in both sense of the phrase), but that may be because of the complexity of valuations affecting it.

One can make it on fundamentals, but that is like skating on the thinnest of ice. In effect fundamentals become like new inputs, something to watch for, rather then something that might give one directionality.

That is all orders are in effect like large cascading orders, unless one believes technical signals are accurate. If they were, then the market would cease to exist as a market.

But the forex market does not, it just eats up any cascading money flow, in fact it came into its own during the crisis and has certainly not been damaged by the post-crisis. But the equity market arguably has, the behavior of it since the crisis is not conducive to investing.

In fact for forex a cascading equity market is content. But it may not be tradable content. So what is it. Can one say that a forex market flooded by money flow does not function. It may not globally optimize.

The effects of that are relative effects between countries in terms of their currency valuations. But that is a huge effect which feeds back to the currency markets and the equity markets. It is perhaps more instability than anything else.

It is that stability that was perhaps sought before the crisis, but finding it, does not seem effective via interventions and similar macro economic controls.

I am suggesting that it may be an emergent property of forex, despite the pricing content given it, in the sense that an emergent property of the Dow's growth processes are companies growing to their potential in their balance sheet.

This is a very good stable form of economic growth, the foundation of enormous wealth and diffused wealth throughout the economy and world especially when it happens in the United States.

If you can increase precision in the way the market values companies, it is less likely that a crisis will occur again.

That is, company growth is stable, but it has valuation issues. Cascading orders can push prices to levels out of sync with asset values. This can happen with companies, sets of companies and the market itself.

Normally this is part of the ebb and flow of markets as retracements bring equity and asset valuations back into line but this can lead to asset pricing being destabilized. That is arguably a depression. If asset pricing is itself mis-priced, a crisis can result (destabilized, mis-priced critical asset sets).

What about forex retracements. Well, forex is an inherently detabilized mis-priced asset market. That is one way of looking at why it functioned well in the crisis. But that itself is the source of its stability as a pricing mechanism. It is optimized precisely to function thus.

If the future of securities is mis-priced assets then at least forex, as least forex is there to catch it. But if the future of securities is creative moats, then forex may be a source of pricing these hard to value companies, from within the market itself.

That would possibly make securities trading like trading forex, except that it would be grounded in growth processes. But it is hard to value companies with creative moats. Would it be easier to ?

That is the question of how much is it possible to make forex a market biased towards profit rather than loss, as a trader. That is, viewing trading itself more like investing.

© 2011 Guy Barry - All Rights Reserved.

Can one examine the market and gain insight into whether the market is moving because of company growth or money flow. In a well functioning market what would one expect to predominate. What happens if it is only company growth.

That is the equity market is entirely composed of advocates of Graham financial analysis, finding well engineered companies to grow, in a growing economy.

This would mean very stable valuations of USD, or would it. I think it might be the reverse. For a day trading environment, the random input of money flow is highly necessary to bring stability.

I suspect as well that companies would not grow in such an environment and a kind of least quality would prevail. In fact if QE2 is well founded, it may be laying the groundwork for high quality companies, already existing, growing to fruition.

That is the sea of forex is a way to optimize, it is highly adaptive, in the way static statements are not. Companies do try and adapt to their environment, but it is a very coarse grained process.

In fact successful companies tend to adapt their environment to them. The markets may play a role in this process. So forex is about a process in the economy to successfully adapt ? This is an idea of markets as meta-processes.

Generally the economy is taken note of, but this does not seem to work as a causal analytical tool. It does not tell you what individual companies share prices will do and it does not usually help you with the movement of a currency pair. However it most certainly does exist.

So what is it doing. Well, if the markets are causally inputting into it, by looking for the effect in the markets, one is looking at the effect and assuming it is the cause. The question is to what extent, as it is sensible to expect that the assumed causality has particular explanatory weight.

So what is market causality. That is the question which confronts one if one does exactly what a trader or short term investor does and trades in the market for profit, that is to ride directionality.

I have suggested that the mind may be able to follow in some sense the underlying causality, but actually capturing this in models or describing it is extremely hard and trading with your intuition is extremely risky.

It was my observation from the crisis that causality is an input of functionality into markets from other markets, which is of a different kind of action than from the effect of external events.

That is there is a greater coherence of action from cross market infusions than from external economic events. This might not be entirely unsurprising as affecting the function of structure with structure needs some symmetry.

The assumption here is there is less structural symmetry between linear events such as interest rate changes and changes in the equity market, referenced to the forex market.

That is the interesting proposition that interest rate changes do not work well, without structural symmetry, which one might conjecture semi-stabilized differentials over time may have provided, except they collapsed at the end.

The collapse may have been related to the growth of the forex market and the lack of symmetry between forex and equities, in fact this is another way of looking at asset re-valuation to true valuations, the assumption that forex and equities need to be in congruence for accurate valuations.

The fact that the forex market continued to function, albeit with volume drops, may suggest that this market achieved a functional move towards greater importance in the markets as a whole.

Essentially for the market to function to grow equity, functionality has to be hidden, because the market works in a competitive manner. Its functionality is partly to hide process.

One might conjecture that it is harder to note the effects of growth versus money flow in forex than in equities, long term, and hence it is very hard to trade long term in forex. It is perhaps though easier to note the effects of growth in short term trades in forex than in equities.

Why, well because process is less hidden in forex day trading than in equities. Because forex is the process of valuation in a fine grained manner. Because this has much less linear directionality than equities, or forced directionality than equities (which the market rejects), potentially one can process trade.

But as well one exposes oneself to great risks, and the outcome of linear trading, a zero sum game (because process is not linear here, and the market does not even try to force it to be).

© 2011 Guy Barry - All Rights Reserved.